Economists: Job Growth, Home Purchases to Drive Housing Market

NEW YORK–Chief economists from the Mortgage Bankers Association, Fannie Mae and Freddie Mac offered cautiously optimistic outlooks for the economy and the housing market, saying key indicators point toward a slowly strengthening, albeit uneven, marketplace.

MBA Chief Economist Michael Fratantoni said the housing finance market has clearly moved toward a purchase market, supported by a stronger job market and a stronger home building market. For full year 2016, MBA expects $1.6 trillion in mortgage originations ($973 billion in purchase originations and $635 billion in refinances), with strong purchase growth and refis dropping off, a pattern that holds through 2018.

For the market to really take off, however, Fratantoni said the marketplace needs to see additional household formation to support the starter home market, which in turn should support the move-up market. “We’ve seen a lot of hesitancy in these markets, but we’re seeing signs that both markets are picking up,” he said here at the MBA National Secondary Market Conference & Expo.

Fratantoni said this is reflected in part in a much stronger purchase market in the MBA Weekly Applications Survey. “You’re going to see stronger performance in both new home sales and existing homes sales,” he said, despite the volatility of the past winter and spring.

Additionally, Fratantoni noted growth across a broad spectrum of the housing market, from starter homes to jumbo. “Housing inventory remains quite tight, particularly at the entry home level, but people who want to move up in the market are finding it increasingly easier to do so.”

Mortgage growth will benefit from job growth; the current average is 150,000 new jobs per month. “You only need about 100,000 new jobs per month to keep the unemployment rate steady,” Fratantoni said. “Our expectation is that the unemployment rate will drop to about 4.7 percent by year end, coinciding with a pickup in wage growth.”

The real struggle for the lending industry right now, Fratantoni said, is in the cost of lending; the most recent MBA quarterly Mortgage Bankers Performance Report showed the average cost to originate has topped $7,000 per loan, a significant increase from $4,000 a few years ago.

Fratantoni attributed the increase in part to new regulatory requirements. “It hasn’t been a trend in origination; it’s been a trend in expenses,” Fratantoni said, adding that a few more quarters will likely be need to fully assess the impact of the TILA/RESPA Integrated Disclosure rule (Know Before You Owe) and other regulations on lenders to see whether those increased costs to originate are permanent. “Six months down the line, we might see a decrease in expenses, but right now it’s the cost of doing business.

Doug Duncan, senior vice president and chief economist with Fannie Mae, Washington, D.C., noted housing affordability will continue to see restraints as the economic expansion matures.

“Many people still remain pessimistic that we are in an economic recovery, in part because the recovery has been so slow and gradual,” Duncan said, noting weakness in income growth and a low supply of housing availability as key factors.

Duncan said he believed interest rates will remain low for the foreseeable future. “The Fed raised rates for the first time in nine years in December, and as a result, mortgage rates fell,” he said. “One of the factors going forward will be inflation…we’ve not seen inflation come to the level of concern for the Fed, which is 2 percent.” He said he expected mortgage rates to remain at or near the 4 percent level, possibly lower.

Fratantoni noted that it doesn’t take much of a mortgage rate increase to have a dampening effect on the refinance market. “If we have mortgage rates go up to 4.1 percent by the end of the year, that should effectively shut off the refinance market,” he said. He added, however that conversely, a drop in rates can also spur refinance activity, particularly among jumbo borrowers.

Sean Becketti, vice president and chief economist with Freddie Mac, McLean, Va., agreed on interest rates, suggesting that they might go up a little bit, but not much. “We see moderate, tepid growth,” he said. “We’re growing, but not strong enough to grow through our problems.”

Becketti offered a more optimistic outlook for the housing market, saying he expects home purchases to grow despite increasing housing prices. “We’ve pretty much drained the market of people who can and should refinance, but we’re also seeing signs of a stronger purchase market,” he said. “Wherever you go, supply is tight and demand is high, resulting from the collapse of the home building market during the recession.”

Becketti said home builders are constrained primarily by construction workers, or a lack therof. “The home building industry lost so many people during the recession–people who simply got out of the business,” he said. “Now, if you talk to a home builder, they’re not talking about the inability to get permits, or finding available land to develop–they’re simply not able to hire enough skilled workers to meet new home demand.”

Tight supply continues to prop up house prices, Becketti said. “We are pretty much above the peak of home prices before the last crisis,” he said. “At first that was a good thing…but now we’ve had this several-years boom in house prices and many places are reporting affordability issues.” He said house prices should “gradually adjust” as housing availability increases.

Becketti said strong underwriting principles suggest credit conditions will not return to 2007 levels. He added that homeowner equity has increased substantially over the past several years, almost to pre-recession levels, while mortgage debt outstanding levels have held fairly steady. But he said he expects home equity borrowing to increase. “I have great confidence in the desire of the American public to consume,” he said.